Gotta Have Faith?

Since 2009, New York law has imposed a mandatory settlement conference once foreclosures are commenced. It imposes a requirement on the lender and borrower to negotiate in “good faith” to see if they can come to a mutually agreed upon alternative to foreclosure that hopefully allows the borrower to stay in his or her house. For the last several years, courts have had a tough time determining what exactly “good faith” is. A decision, Wells Fargo Bank, NA v. Meyers, published Wednesday deals with an even more vexing question: what power does a court have to fashion a remedy where the facts demonstrate that a lender acted in bad faith.

For those of you outside the state reading this blog, it is still worth reading. The regulations promulgated by the CFPB envision a system in which parties facing foreclosure seek modifications to the mortgages and lenders evaluate and respond to these requests. In other words, the question of what constitutes good faith in foreclosure prevention efforts is laying in wait for lenders all across the country. Oh Boy!

I’ll spare you most of the gory details, but for purposes of summarizing the decision it is safe to say that this is a blatant example of a bank, in this case Wells Fargo, ostensibly agreeing to a HAMP modification on the one hand, while actually continuing foreclosure proceedings on the other. The trial court ultimately held a hearing to determine if the bank had violated its good faith obligation. The hearing clearly established that it had. However, the record also demonstrated that Wells Fargo was not authorized by Freddie Mac, for whom it was servicing the mortgage, to go ahead with a HAMP modification. The borrower technically did not meet the HAMP criteria, which brings us to the issue that was appealed. The trial court decided that the appropriate remedy in this case was to mandate that the bank agree to the very HAMP modification that the GSE had rejected.

Do the courts have the power to impose specific terms on a lender? No, said the court, doing so violates both the bank’s contract clause power and due process rights under the U.S. Constitution. Here are some of the court’s key conclusions.

Stability of contract obligations must not be undermined by judicial sympathy. “The courts may not rewrite the contract that the parties freely entered into — the loan and mortgage agreements — upon a finding that one of those parties failed to satisfy its obligation to negotiate in good faith.” The courts may only interpret and enforce terms of a contract agreed to by the parties.

Imposing the HAMP modification on Wells Fargo when it had not agreed to the terms amounted to a violation of the U.S. Constitution’s contract clause (Article I, Section 10 [1]) because it amounts to a substantial impairment of the right of the parties to enter into a contract if they choose.

The remedy imposed by the trial court also violates the due process clause of the constitution since Wells Fargo had no advanced notice that such a remedy could be imposed.

Now remember, New York Courts aren’t exactly known for their conservative judicial philosophy. When one of their appellate divisions starts talking about the contract clause, it’s worth paying attention. This case amounts to a plea for either administrative or legislative guidance specifying the powers that can be exercised by trial courts in fashioning a remedy for a good faith violation. In short, this decision should not be read as breathing life into a Constitutional provision that has been all but discarded for several decades now. Rather, the court is simply stating that absent legislative authorization, a court’s ability to impose contractual obligation has its limits.